India raises interest rates by quarter-point

Gov. Subbarao calls for supply-side measures to cool prices

By

V.Phani Kumar

HONG KONG (MarketWatch) — The Reserve Bank of India raised its benchmark interest rate by 0.25 percentage point on Tuesday, marking its seventh such increase since the beginning of 2010 to cool soaring prices.

The RBI also acknowledged that price pressures were likely to persist because of imbalances in the demand and supply of commodities such as agricultural output and crude oil. The RBI said it aims to prevent a spillover of food and fuel inflation into broader prices.

The RBI left the country’s economic growth forecast unchanged at 8.5%, but sharply increased its wholesale-price-index-based-inflation forecast for March 2011 to 7% from 5.5%.

Toyota keeps No. 1 title

Tuesday’s quarter-point rate increase takes the central bank’s policy repurchase or repo rate — at which it lends money to commercial banks — to 6.5%. The RBI also increased the reverse repo rate, at which it absorbs money from banks, by 0.25 point to 5.5%. Both decisions were in line with expectations.

“Inflation is clearly the dominant concern. Even as the rate itself remains uncomfortably high, the reversal in the direction of inflation is striking,” Gov. Duvvuri Subbarao said in a statement accompanying the RBI’s quarterly policy review, referring to a rebound in food prices in December after they eased between August and November.

Analysts said that while the RBI decisions were in line with expectations, the tone of Gov. Subbarao’s statement suggested he intended to tackle price pressures through proactive measures.

“The 25-basis-point hike was in line with expectations, but factor in the hawkishness of the statement and you have a better sense of how concerned RBI is about inflation. We believe another 100 basis points are needed to tame inflation and the next hike could well come as soon as March,” HSBC’s Chief India Economist Leif Lybecker Eskesen wrote in a note.

Calls for supply-side reforms

Gov. Subbarao called on the need for rapid action to increase the output of a number of products, whose demand is soaring because of changing consumption patterns as income levels rise in the country.

“Unless meaningful output enhancing measures are taken, the risks of food inflation becoming entrenched loom large and threaten both the sustainability of the current growth momentum and the realization of its benefits by a large number of households,” he said.

Ahead of the upcoming federal budget in February, Subbarao also said the government’s large fiscal deficit was a challenge to managing inflation.

He said that if the administration were able to spend more on capital expenditure, it would help deal with “bottlenecks that contribute to supply-side inflationary pressures.”

Stocks, rupee fall

While tightening the rates, the RBI offered some relief to lenders faced with a cash crunch in the banking system — by extending a liquidity support facility by more than two months. Banks can now access the additional liquidity support, which is equal to 1% of banks’ net demand and time deposits, until April 8, as compared to Jan. 28, when the facility was due to expire.

“The bias of the central bank at the moment is to continue with the ongoing monetary tightening — we factor in a further hike of [0.75 percentage point] in the repo rate during 2011,” Barclays economists Siddhartha Sanyal and Kumar Rachapudi wrote in a note to clients.

The U.S. dollar
USDINR, -0.0188%
was fetching 45.73 rupees after the rate decision Tuesday, compared with INR45.48 the previous day.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.